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Investment Outlook Drops Amid Economic Disruption

October 2022

Significant market headwinds, including a slowdown in economic momentum, rising interest rates, ongoing supply chain disruption, labor shortages and the threat of a recession are adversely impacting investor sentiment heading into the year-end. As financial markets react to the Fed’s ongoing efforts to tame inflation, many commercial real estate investors and lenders are recalibrating, stepping back or taking a more cautionary approach to investment activity. This sentiment strikes a notable contrast to the optimistic forecasts voiced at the beginning of 2022, when many industry experts expressed confidence in a strong growth trajectory for the year.

As the Fed continues its efforts to raise interest rates to tamp down inflation, there is growing concern about whether that approach will produce the desired results without triggering a recession. Investment and brokerage professionals surveyed for this report overwhelmingly voiced concern about an economic recession, with only 10% being unconcerned about a recession.

Office Market Upheaval as Hybrid Model Impacts Occupancy

The office market is in the midst of significant upheaval, as companies work through myriad return-to-work options. Some are walking a tightrope between requiring employees to return to the office and providing flexible solutions to support employee preferences. It’s a complicated exercise that is playing out across the country — and creating much turmoil in the office leasing and investment markets. In short — there is no “one size fits all” approach and the results will take a few years to materialize.

Key highlights from the Fall 2022 LightBox Sentiment Report:

Economic Outlook

  • Nearly 70 percent of respondents were concerned or bearish about the CRE market for the balance of 2022; that sentiment dropped to 58 percent when projecting out to 2023.
  • 90 percent were concerned for a recession.

Office Sector

  • Office vacancies remain a concern, with the slow migration back to the office seen more in large urban metros. There are signs of positive momentum as large technology firms such as Google add high-amenity campuses in New York, Chicago, Austin and other markets.
  • Office occupancy levels in mid-September averaged 48% across a list of to 10 markets tracked by office security firm Kastle. Austin had the highest (61%) followed by Houston (57%). San Jose had the lowest (40%) while New York was (47%).
  • In 2022, price PSF dropped nationally and in Manhattan, Boston and The Bay Area, but increased in Seattle and L.A.

Industrial Sector

  • Industrial rent growth is expected to be over 20% for the near future, given strong demand and limited supply in many markets.
  • Multi-story industrial buildings and robotics are the wave of the future, as construction costs and labor shortages push back against e-commerce growth.

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